Global risk weighs on Howard's agenda

By CNN's Geoff Hiscock
Asia business editor

SYDNEY, Australia (CNN) -- Growth of three percent-plus, a competitive currency, higher prices for key exports, the lowest interest rates in almost 30 years and a stock market back above September 11 levels: This is the relatively benign economic landscape Australian Prime Minister John Howard surveys as he begins his third term as leader.

But not all the signs are good for Howard, who won an emphatic victory in a national election at the weekend.

As the Reserve Bank of Australia observed Monday in its quarterly survey of the economy, the downside risk is from abroad.

Weakness in the global economy, particularly among Australia's key trading partners Japan, the U.S. and Europe, remains a concern.

"The worsening outlook for the world economy and uncertainty created by the events of mid-September have increased the risks … particularly for export-oriented businesses," the central bank said.

Little margin for error with economy

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Howard, who campaigned on a theme of "keep Australia in safe hands" in a time of insecurity, now has little margin for error with his economic management.

The federal government's budget surplus for 2001-2 has all but gone, spent in recent months on politically popular moves such as stepped-up defense patrols against refugee boats seeking to land in Australia, and earlier, on tax cuts on petrol prices.

Howard and his Treasurer, Peter Costello, have argued that their economic management skills were superior to those of their Labor opponents. The Australian electorate has taken them at their word.

But now they will have to deliver. On their side is a very strong housing and construction sector, helped along by grants to first-home buyers, and the likely prospect that the Reserve Bank will cut rates again before the end of the year.

Rate cut expected in December


Labor leader Kim Beazley stepped down after his defeat on Saturday night

Most economists expect a cut of between a quarter and a half percentage point when the bank meets early next month. It chose not to follow the U.S. Federal Reserve's November 6 rate cut, leaving the cash rate at 4.5 percent -- the lowest since 1972.

The gap between the U.S. and Australian interest rates is now 2.5 percent, which is the widest differential since March 1993.

One consequence is that the Australian dollar is starting to strengthen from around 51 U.S. cents, after touching a record low of 47.75 U.S. cents in April.

The cheap dollar has made Australian exporters super-competitive and boosted inbound tourism (until September 11), but the downside has been the high cost of imported capital goods.

On the business front, the Australian Chamber of Commerce and Industry said Monday its members see a return to more normal business conditions in the months ahead, after a gloomy response in September and October.

And another of the country's main business lobby groups, the Business Council of Australia (BCA), has urged Howard to push ahead with taxation reform to keep the economy firing.

Emphasis on education, immigration, flexibility

Along with tax reform -- particularly tax changes that favor foreign investors and venture capitalists -- business lobby groups want greater emphasis on education and training, and more flexibility in the workplace to cope with changing economic circumstances.

They also want Australia to lift its intake of skilled immigrants.

"We think the priority for the incoming government must be the continued development of the Australian economy," BCA president Dr John Schubert said Monday.

"At the outset of the campaign, Australia's business leadership outlined the key public policy initiatives required to grow the economy - modernising the international tax and regulatory regimes, education and training and maintenance of workplace flexibility," he said.

Ansett, Telstra head high-profile challenges

Apart from responding to this business agenda, Howard faces a couple of high-profile corporate challenges.

One involves a rescue plan for the nation's second-largest domestic carrier, Ansett Airlines, following its grounding in September.

Two of Australia's richest tycoons, transport king Lindsay Fox and retailer Solomon Lew, have proposed a relaunch of a slimmer version of Ansett to serve main trunk routes.

But their $1.8 billion deal hinges on a hefty amount of federal government and state government assistance -- a stance that has provoked howls of protest from Virgin Blue, the discount newcomer that has grown rapidly since the demise of Ansett.

Another challenge is selling off the remainder of Telstra, the big telco that was part-privatised by the government in 1997.

Telstra was a key policy difference between Howard and his Labor opponent Kim Beazley, who stepped down as leader after Saturday's election loss.

Beazley promised not to sell off the government's 51 percent stake in Telstra. Howard said the Liberal-National coalition would sell only after it was assured there would be no loss of service to rural users.